Even Warren Buffett Can't Save the Small Newspaper Business
See below for the name of the wise soul who first voiced this opinion... but first, let's take a look at how it's proving out in practice.
The Price Barely Covers the Paper It's Printed On
If there's a business that fits the definition of "poor fundamental economics," newspapers is it. It may be an urban legend, but estimates suggesting that the price of your average newspaper subscription barely pays for the paper it's printed on -- and doesn't come close to covering the cost of delivery, reporter salaries, and other overhead -- probably aren't far from the mark.
Meanwhile, everywhere you turn, companies are rising up to siphon away the revenues that newspapers need to cover their costs. Craigslist and its free classified ads. Google (GOOG) and Yahoo! (YHOO) -- and yes, DailyFinance's parent corporation AOL (AOL), too -- offering free the news and views that newspapers charge for. What once was a cash cow has morphed into a miserable business model that's killed many a paper over the past couple of decades.
And so it was with great rejoicing that news readers received the news in May that billionaire investor Warren Buffett was going to try to single-handedly save the American newspaper industry. Announcing a $142 million bid to buy 63 struggling newspapers from Media General (MEG), Buffett put the full financial muscle of Berkshire Hathaway (BRK.A)(BRK.B) -- market cap: $217 billion -- at the disposal of his new papers. He promised them a chance to "operate from a position of financial strength," backed by a company with "capital and liquidity second to none."
Another One Bites the Dust
In November, Berkshire announced its decision to shutter the Northern Virginia-based Manassas News & Messenger, and lay off all 33 of the paper's employees. The Messenger, which publishes five days a week in the suburbs of Washington, D.C., and boasts a circulation of some 10,000 souls, confirmed in November that it will close down for good on Dec. 30. Its parent company is simultaneously closing the related InsideNoVA Weekly newspaper, and its companion InsideNoVA website.
"Our 33 dedicated News & Messenger employees," said the Messenger in a statement, "worked very hard as we took several approaches to make this newspaper successful. Despite those efforts ... we do not see a long-term viable way to maintain a daily news operation here."
How Did It Come to This?
If Warren Buffett himself couldn't make the Messenger viable, what chance do other papers have?
This is no rhetorical question. Let's consider for a moment: What does it take to make a newspaper "viable"?
Let's start with the Messenger's 33 staffers, now all looking for work. To employ these folks at the U.S. median household income of $50,000 per year, you need approximately $1.65 million in annual revenues.
Assuming an annual circulation of 10,000 -- the number the Messenger claimed -- that works out to $165 in revenues needed from every subscriber to the paper, which comes to $0.45 a day.
That's assuming no overhead -- no phone bills, electric bills, office rent, Internet accounts, computers, or AP wire fees required. (It's also assuming no income from advertisers. Of course, in this day and age of ever-rising inflation and ever-rising competition from free classifieds services such as Craigslist, the latter assumption is probably closer to the truth than the former.)
Result: Even if Messenger subscribers ponied up $0.45 a day, every day of the year, and even if all 10,000 subscribers on the circulation list resubscribed like clockwork, year in and year out, the Messenger would still have faced a serious cash crunch, and might not have been viable.
Not likely. And it gets worse. If you're content to get your local news from friends on Facebook (FB), a real paper of record like The Wall Street Journal can be had for as little as $24.95 a year on eBay (EBAY). That's half the cost of the Post, and barely a seventh of what the Messenger would need to charge just to survive.
What's it mean to you?
The conclusions for news readers are obvious: A paper of the Messenger's size, at the rates the Messenger was able to charge, simply wasn't viable. Many small papers in similar straits may well share its fate in the coming years.
In all likelihood, if we want to maintain a viable small-town newspaper industry in America, the cost of our subscriptions must rise -- and subscribers must happily pay the higher prices, rather than seek out "deals" to lower the cost of their subscriptions. Otherwise, someday soon, there simply won't be anything left to subscribe to.
Oh, and the wise old soul who made the observation about reputations for "poor fundamental economics" and so on? That was none other than Warren Buffett himself.
Motley Fool contributor Rich Smith has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook and Google and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Berkshire Hathaway, eBay, Facebook, Google, and Yahoo!